Personal loans : Basics of a personal loan (part II)

Talk terms
So what kind of rates can you expect to see? Terms on two-year bank personal loans are averaging above 11.8 percent, according to the most recent (February 2004) numbers from the Federal Reserve.

But Hillebrand believes that credit unions might have an edge over banks when it comes to small loans.

"I would always start with credit unions," she says. "They have better rates and less abusive terms."

Ninety-six percent of credit unions offer short-term unsecured loans -- and more than half (60 percent) will make loans for amounts less than $500, according to figures from CUNA. The average amount borrowed is roughly $2,300. In addition, at least one-fifth of credit unions will make loans under $500 with just "a limited credit check," says Schenk.

If you're looking for a loan, here's a quick shopping list:

1. "Look at the total cost of the credit -- not just the monthly payments," says Hillebrand. And "a lower monthly payment is not always better."

2. Look for hidden charges. Study all the associated fees. Things to look for: credit insurance, buying clubs and any other extra fees. If you don't understand it, have the loan officer explain the charge. "Look at each of the itemized [charges] and ask about it," she says.

3. And finally, if what you're being told by the loan officer is different from what's in your contract -- walk. Once you sign, promises from a loan officer, who may or may not be working at the institution next week, are meaningless. What counts is what's in writing.

And when it comes to loans, bigger is not always better.

Sometimes, loan officers will try to talk borrowers into taking a little more money than they had originally planned, says Hillebrand. That may be because the officer gets a commission based on the loan amount (more likely at a finance company) or because state regulations are looser for larger loans, she says.

While that may sound like a great deal initially, it could be a lousy deal years later if you end up carrying a balance at 21 percent. Instead, opt for a specific loan amount with fixed monthly payments and a finite repayment schedule.

And learn from the experience. This might be the perfect time to sock away some money for the next rainy day.

"Think about opening a savings account at the same time," says Hillebrand. "The savings habit has to start sometime."